The unilateral extension of trade credit to the Italian government

An ongoing issue is that the government is simply delaying payments to private suppliers:

Beppe Grillo, leader of the opposition 5-Star Movement, has long hammered on this point. In April, during the post-election interregnum, he’d clamored for “the immediate payment of about €120 billion” that the government and public entities owed the private sector.

The government’s refusal to pay its suppliers violates EU rules. But the EU has soft-pedaled the issue, for two very big reasons: payment of arrears would force Italy to sell a truckload of bonds when there might not be any demand; and it would push the deficit way beyond the 3% line in the sand. Thanks to cash accounting, only actual disbursements make it into the deficit figure. Italy has achieved its “austerity” goals by not paying its suppliers.

There is also this:

…[government] expenditures rose 1.3% in the first quarter, while revenues remained flat.

“You can think of these delayed payments as a form of anti-stimulus of course.”

Au contraire (or should I say invece) — if the Italian government wasn’t using its leftover money to artificially stimulate private employment and private consumption it would have some leftover to pay the private bills.

Kind of reminds me of Illinois. So far it’s problem is much smaller, at around $9 billion in late unpaid bills, but it certainly a problem when state-issued cards get declined. On the bills it did pay, it racked up $86 million in late fees, the most in the nation.

“We regret having to cut off the State of Illinois, but our accountants concluded that with the 28 percent interest rate the state pays, coupled with the monthly late-payment penalty fee for every payment since 2003, and only minimum disbursements made, we figure Illinois will have settled its credit card debt by the year 2119.”

In the “normal” interest rate environment of the 1980’s, my standard terms to customers were 2% discount 10, net 30, 1.5% monthly 30+. This included a large utility and several government agencies. Most every other small business did the same. It helped cash flow by prodding big customers with creaky payment processes, as their cost of financing payables was considerably less than 18% annually.

If this becomes standard business practice in Italy, the payments problem will solve itself. Even the dullest pencil-pusher will see the wisdom of borrowing at 8% from the bond market to avoid 18% vendor charges.

During the 90’s some socialist provincial governments issued bonds that paid 16%.

It isn’t a matter of paying less interest, it is a matter of finding a sucker, any sucker who will lend you money. Not paying suppliers is a great way of doing it, you can get 3,4 months of operating capital before the screaming starts, then you have them by the short hairs, either keep supplying or we won’t pay anything.

This is insolvency.

A note of interest. The age of my receivables to large corporations is a very strong indication of the state of the economy. Usually they are 25-35 days, but they stretch it out, especially on the larger invoices when their sales are stagnant. In this market survival is not making a sale, it is getting paid in a timely way.

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